Pertaining to finance, net volume refers to the difference between a security's uptick volume and its downtick volume over a given period. In the formula for net volume, the uptick volume is that portion of trades in which the security price is higher than the price of the previous trade, while the downtick volume is that amount of trades for which the security price is lower than that of the previous trade. Net volume, which is calculated by subtracting the downtick volume from the uptick volume, is one of many tools used by investors for technical analysis of securities. A study of net volume helps to identify and track trends in the market. Furthermore, net volume gauges the strength of a downward or an upward trend.
When making investment decisions, investors engage in two basic methods of analysis — technical and fundamental. Fundamental analysts research the company's products, services, balance sheet, cash flow, and other company-specific information in order to establish the real value of a company's stock. Investors who follow the fundamental analysis style of investing want to invest in stocks that are trading at an undervalued price, based on their analysis. On the other hand, technical investors utilize historical market performance, market trends, prices, and volume indicators, including net volume, to determine the stocks in which to invest. Technical investors stand on the principle that the market price of a stock always accurately depicts the true value of a stock and takes into account the complex mix of business leadership, performance, supply and demand, and investor psychology that plays a role in driving market prices.
Net volume critically confirms trends and chart patterns. Movements, whether upward or downward, are perceived to be more relevant and strong when accompanied by increases in volume. Net volume should match the trend, so that a price uptrend occurs in association with an increasing net volume. When price and volume do not follow each other, such as when a definite price uptrend occurs with a decrease in volume, the resulting divergence serves as a potential indicator of an upcoming change in the trend. In general, changes in volume precede changes in price.
The money flow index (MFI) is similar to the net volume in that it indicates momentum in the market. It uses both price and volume to measure the intensity of investor conviction within a current trend. Investors can calculate the MFI by determining the ratio of the positive money flow divided by the negative money flow. The MFI range runs from zero to 100, with values below 20 indicating undervalued stocks that have been oversold. Conversely, MFI values above 80 point to over-valued, overbought stocks, which will probably experience a price correction in the near future.
